Question 1

Marcus is of the opinion that the theory of liquidity preference explains the determination of the interest rate very well. Most economists would say that Marcus's opinion is
A) Keynesian in nature, and that his view is more valid for the long run than for the short run.
B) classical in nature, and that his view is more valid for the long run than for the short run.
C) Keynesian in nature, and that his view is more valid for the short run than for the long run.
D) classical in nature, and that his view is more valid for the short run than for the long run.

Accepted Answer

Marcus's opinion aligns with the Keynesian theory of liquidity preference, which emphasizes the role of demand for money in determining the interest rate in the short run. This theory is more relevant for the short run because in the long run, other factors such as productivity, savings, and investment become more significant determinants of the interest rate. Therefore, option C is the correct choice.

Question 2

The interest rate that the Federal Reserve pays banks on the reserves they hold is called the
A) open-market rate.
B) discount rate.
C) preference rate.
D) None of the above are correct.

Accepted Answer

The answer of The interest rate that the Federal Reserve...

Question 3

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. 
-Refer to Figure 34-4. Suppose the money-demand curve is currently MD2. If the current interest rate is r2, then
A) in response, the money-demand curve will shift rightward from its current position to establish equilibrium in the money market.
B) people will respond by selling interest-bearing bonds or by withdrawing money from interest-bearing bank accounts.
C) bond issuers and banks will respond by lowering the interest rates they offer.
D) there is a shortage of money.

Accepted Answer

The answer of Figure 34-4. On the figure, MS represents...

Question 4

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. 
-Refer to Figure 34-4. Which of the following events could explain a shift of the money-demand curve from MD1 to MD2?
A) a decrease in the price level
B) a decrease in the cost of borrowing
C) an increase in the price level
D) an increase in the cost of borrowing

Accepted Answer

The answer of Figure 34-4. On the figure, MS represents...

Question 5

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. 
-Refer to Figure 34-4. Suppose the money-demand curve is currently MD1. If the current interest rate is r2, then
A) the quantity of money that people want to hold is less than the quantity of money that the Federal Reserve has supplied.
B) people will respond by selling interest-bearing bonds or by withdrawing money from interest-bearing bank accounts.
C) bond issuers and banks will respond by lowering the interest rates they offer.
D) in response, the money-demand curve will shift rightward from its current position to establish equilibrium in the money market.

Accepted Answer

If the current interest rate is r2 and the money-demand curve is MD1, then the quantity of money that people want to hold is greater than the quantity of money that the Federal Reserve has supplied. This creates a shortage of money in the market, causing people to sell interest-bearing bonds or withdraw money from interest-bearing bank accounts to obtain the needed funds. This increased demand for money will cause bond issuers and banks to lower the interest rates they offer. As a result, the money-demand curve will shift rightward from its current position to establish equilibrium in the money market.

Question 6

In response to the sharp decline in stock prices in October 1987, the Federal Reserve
A) increased the money supply and increased interest rates.
B) increased the money supply and decreased interest rates.
C) decreased the money supply and increased interest rates.
D) decreased the money supply and decreased interest rates.

Accepted Answer

The answer of In response to the sharp decline in...

Question 7

Which of the effects listed below increases the quantity of goods and services demanded when the price level falls and decreases the quantity of goods and services demanded when the price level rises?
A) the wealth effect
B) the interest-rate effect
C) the exchange-rate effect
D) All of the above are correct.

Accepted Answer

The answer of Which of the effects listed below increases...

Question 8

The exchange-rate effect is based, in part, on the idea that
A) a decrease in the price level reduces the interest rate.
B) an increase in the price level causes investors to move some of their funds overseas.
C) an increase in the price level causes domestic goods to become less expensive relative to foreign goods.
D) a decrease in the price level reduces spending on net exports.

Accepted Answer

The answer of The exchange-rate effect is based, in part,...

Question 9

In response to the sharp decline in stock prices in October 1987, the Federal Reserve
A) increased interest rates, and the economy avoided a recession.
B) increased interest rates, but the economy was unable to avoid a recession.
C) decreased interest rates, and the economy avoided a recession.
D) decreased interest rates, but the economy was unable to avoid a recession.

Accepted Answer

The Federal Reserve decreased interest rates in response to the sharp decline in stock prices in October 1987. This action helped to stimulate economic activity and avoid a recession.

Question 10

"Monetary policy can be described either in terms of the money supply or in terms of the interest rate." This statement amounts to the assertion that
A) shifts of the money-supply curve cannot occur if the Federal Reserve decides to target an interest rate.
B) the aggregate-demand curve will not shift in response to Federal Reserve actions if the Fed decides to target an interest rate.
C) changes in monetary policy aimed at contracting aggregate demand can be described either as decreasing the money supply or as raising the interest rate.
D) the activities of the Federal Reserve's bond traders are irrelevant if the Federal Reserve decides to target an interest rate.

Accepted Answer

Monetary policy can be described in terms of either the money supply or the interest rate because changes in monetary policy that aim to contract aggregate demand can be achieved by decreasing the money supply or by raising the interest rate. Therefore, these two descriptions of monetary policy are often used interchangeably. The other options presented in the question are either incorrect or incomplete.

Question 11

Charisse is of the opinion that the interest rate depends on the economy's saving propensities and investment opportunities. Most economists would say that Charisse's opinion is
A) Keynesian in nature, and that her view is more valid for the long run than for the short run.
B) classical in nature, and that her view is more valid for the long run than for the short run.
C) Keynesian in nature, and that her view is more valid for the short run than for the long run.
D) classical in nature, and that her view is more valid for the short run than for the long run.

Accepted Answer

Charisse's opinion aligns with classical theory, which states that the interest rate is influenced by the economy's saving and investment choices. This view is more valid for the long run as it assumes that the market will eventually adjust to reflect these choices. In the short run, other factors such as changes in government policy or unexpected events can also impact interest rates.

Question 12

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. 
-Refer to Figure 34-4. Suppose the current equilibrium interest rate is r3. Which of the following events would cause the equilibrium interest rate to decrease?
A) The Federal Reserve increases the money supply.
B) Money demand decreases.
C) The price level decreases.
D) All of the above are correct.

Accepted Answer

The answer of Figure 34-4. On the figure, MS represents...

Question 13

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. 
-Refer to Figure 34-4. Suppose the current equilibrium interest rate is r1. Let Y1 represent the corresponding quantity of goods and services demanded, and let P1 represent the corresponding price level. Starting from this situation, if the Federal Reserve increases the money supply and if the price level remains at P1, then
A) there will be an increase in the equilibrium quantity of goods and services demanded.
B) there will be a decrease in the equilibrium quantity of goods and services demanded.
C) there will be an increase in the equilibrium interest rate.
D) fewer firms will choose to borrow to build new factories and buy new equipment.

Accepted Answer

An increase in the money supply will shift the MD curve to the right, causing the equilibrium interest rate (r1) to decrease. This will increase investment and consumption spending, leading to an increase in the quantity of goods and services demanded (Y1). Since the price level is held constant, there will be no impact on the supply side of the economy, and the equilibrium quantity of goods and services will increase.

Question 14

"Monetary policy can be described either in terms of the money supply or in terms of the interest rate." This statement amounts to the assertion that
A) rightward shifts of the money-supply curve cannot occur if the Federal Reserve decides to target an interest rate.
B) the activities of the Federal Reserve's bond traders are irrelevant if the Federal Reserve decides to target an interest rate.
C) changes in monetary policy aimed at expanding aggregate demand can be described either as increasing the money supply or as increasing the interest rate.
D) our analysis of monetary policy is not fundamentally altered if the Federal Reserve decides to target an interest rate.

Accepted Answer

The statement asserts that both the money supply and the interest rate can be used to describe monetary policy. Therefore, if the Federal Reserve decides to target an interest rate, it would not fundamentally alter our analysis of monetary policy. Choices A, B, and C are not necessarily true or related to the assertion made in the statement.

Question 15

When the interest rate is below the equilibrium level,
A) the quantity of money that the Federal Reserve has supplied exceeds the quantity of money that people want to hold.
B) people respond by selling interest-bearing bonds or by withdrawing money from interest-bearing bank accounts.
C) bond issuers and banks respond by lowering the interest rates they offer.
D) All of the above are correct.

Accepted Answer

The answer of When the interest rate is below the...

Question 16

For the U.S. economy, money holdings are a
A) large part of household wealth, and so the interest-rate effect is large.
B) large part of household wealth, and so the wealth effect is large.
C) small part of household wealth, and so the interest-rate effect is small.
D) small part of household wealth, and so the wealth effect is small.

Accepted Answer

Money holdings are typically a small part of household wealth and do not have a large impact on the economy through the interest-rate effect or wealth effect. Therefore, choice D is the best answer.

Question 17

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. 
-Refer to Figure 34-4. Which of the following events could explain a decrease in the equilibrium interest rate from r1 to r3?
A) a decrease in the price level
B) a decrease in the number of firms building new factories and buying new equipment
C) an increase in the price level
D) an increase in the number of firms building new factories and buying new equipment

Accepted Answer

The answer of Figure 34-4. On the figure, MS represents...

Question 18

When the interest rate is above the equilibrium level,
A) the quantity of money that people want to hold is less than the quantity of money that the Federal Reserve has supplied.
B) people respond by buying interest-bearing bonds or by depositing money in interest-bearing bank accounts.
C) bond issuers and banks respond by lowering the interest rates they offer.
D) All of the above are correct.

Accepted Answer

The answer of When the interest rate is above the...

Question 19

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. 
-Refer to Figure 34-4. Suppose the current equilibrium interest rate is r1. Which of the following events would cause the equilibrium interest rate to increase?
A) The Federal Reserve increases the money supply.
B) Money demand increases.
C) The price level decreases.
D) All of the above are correct.

Accepted Answer

If money demand increases, it means people want to hold more money compared to other assets at the current interest rate. This will cause a shortage of money and the equilibrium interest rate will increase to balance the market. Option A would decrease the interest rate as the money supply increases, and option C would have an ambiguous effect on the interest rate as the relationship between the price level and the interest rate is unclear. Therefore, only option B is correct.

Question 20

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. 
-Refer to Figure 34-4. Suppose the current equilibrium interest rate is r3. Let Y3 represent the corresponding quantity of goods and services demanded, and let P3 represent the corresponding price level. Starting from this situation, if the Federal Reserve decreases the money supply and if the price level remains at P3, then
A) there will be an increase in the equilibrium quantity of goods and services demanded.
B) there will be a decrease in the equilibrium interest rate.
C) the aggregate-demand curve will shift to the right.
D) fewer firms will choose to borrow to build new factories and buy new equipment.

Accepted Answer

The answer of Figure 34-4. On the figure, MS represents...

Quiz 24: The Influence of Monetary and Fiscal Policy on Aggregate Demand

Marcus is of the opinion that the theory of liquidity preference explains the determination of the interest rate very well. Most economists would say that Marcus's opinion is

The interest rate that the Federal Reserve pays banks on the reserves they hold is called the

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 34-4. Suppose the money-demand curve is currently MD2. If the current interest rate is r2, then

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 34-4. Which of the following events could explain a shift of the money-demand curve from MD1 to MD2?

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 34-4. Suppose the money-demand curve is currently MD1. If the current interest rate is r2, then

In response to the sharp decline in stock prices in October 1987, the Federal Reserve

Which of the effects listed below increases the quantity of goods and services demanded when the price level falls and decreases the quantity of goods and services demanded when the price level rises?

The exchange-rate effect is based, in part, on the idea that

In response to the sharp decline in stock prices in October 1987, the Federal Reserve

"Monetary policy can be described either in terms of the money supply or in terms of the interest rate." This statement amounts to the assertion that

Charisse is of the opinion that the interest rate depends on the economy's saving propensities and investment opportunities. Most economists would say that Charisse's opinion is

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 34-4. Suppose the current equilibrium interest rate is r3. Which of the following events would cause the equilibrium interest rate to decrease?

"Monetary policy can be described either in terms of the money supply or in terms of the interest rate." This statement amounts to the assertion that

When the interest rate is below the equilibrium level,

For the U.S. economy, money holdings are a

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 34-4. Which of the following events could explain a decrease in the equilibrium interest rate from r1 to r3?

When the interest rate is above the equilibrium level,

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 34-4. Suppose the current equilibrium interest rate is r1. Which of the following events would cause the equilibrium interest rate to increase?